PB Ratio (Price to Book Value Ratio) - Explained in Hindi | #45 Master Investor - YouTube

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Namashkar, my name is Mukul and you are welcome to Asset yogi.

Friends, this video is a part of a series in which we are discussing the Valuation ratio.

In our previous 2 videos, we have understood the PE ratio and PEG ratio.

In which we had seen that the correct price of 1 share can be calculated through analysing its earnings and profits.

If you haven't watched these two videos, then I would suggest that you must watch those videos first.

You will find the links in the description below.

Now see, many times it is tough to analyse the earnings.

Suddenly, when in a particular year suppose the earnings of the company has become very less.

Or went negative.

And maybe its future outlook is very good in the coming time.

It doesn't always make losses.

So in such cases,

Price Earning Ratio or PEG ratio makes it a bit difficult for you to do stock analysis.

So in such a case, you get the price to book value handy to calculate the correct price of a share.

Now, What is book value?

See, if I tell you in a simple language then book value is,

if you auction or sell all the assets of any company and pay the all remaining liabilities.

So the remaining money is called the book value.

So when we talk about price to book value,

price means share price, it is your market value.

So we will try to establish a relation between market value and book value.

That is, the share price is how many times as compared to the book value.

So in this video, we will understand the calculations of price to book value.

How you will interpret the price to book value?

And along with that, we will also see how will you calculate the price to book value of a company online.

Let's go straight to the blackboard.

So to find the P/B ratio, first, we have to understand the book value.

The net assets of any company, as per books of Accounts.

That's what we call book value.

What are net assets?

From whatever tangible assets the company have you subtract the liabilities, and you will get the book value.

We can also call it a company's net worth or Shareholder equity,

that what is the value of the shareholder's shares, according to accounting.

Now the tangible assets; keep in mind that you have to take tangible assets only.

Intangible assets like brand, technology; you cannot value all these in the accounts.

They should not be taken.

What are your tangible assets? They are the fixed assets like plants, machinery, land, building etc.

Plus if you add current assets to it, then you get the tangible assets.

Out of that if liabilities are subtracted then you will get the book values.

Let's understand this with an example.

Let's say total assets of a company, here I write assets.

Write the assets here.

Let's say the total tangible assets of the company is 20 crores.

And to finance this, let's say loans of 5 crores has been taken.

So these loans basically became liabilities, and here I assume that the total liabilities of the company is 5 crores.

So here, the balance that is left is 15 crores.

This is your shareholder's equity.

This we also call net worth.

And this becomes your book value of a company.

So, what is the book value of a company?

We have seen total tangible assets of 20 crores from that we will subtract liabilities of 5 crores.

How much did this become? The total book value of the company becomes 15 crores.

Now what we have to do after it?

We have to find the book value per share.

So what is the formula for book value per share?

The total book value that you found out, will divide by the total number of shares.

Let us assume that this company have a total number of shares equal to 10 lacs.

So, how much did find the book value? It was 15 crores. If you divide this by 10 lacs.

So you will get the book value of 1 share.

How much did it become? Rs 150 is the book value of 1 share.

Now we will come to our P/B ratio formula.

The formula for the P/B ratio is the share price divided by the book value per share.

What is the share price?

The current market price as of today's date of the company's shares whether you see it on Sensex or Nifty.

So you will take that share price and divide it by the book value per share.

Let's say in today's date this company's share price is going on Rs 200.

You will divide it by Rs 150 which is its current book value.

Here, if you will find the value then it comes out to be 1.33.

It can have a direct formula i.e. you can divide the total market value of the company by its total book value.

What is this total market value?

Company's market capitalisation on Sensex or Nifty.

How will we find market capitalisation? I had talked about this in many videos.

You can directly multiply the company's share price i.e. Rs 200 with the number of shares i.e. 10 lacs.

So you will get the total value of the company according to the market means how much value people are putting on it.

How much did it come out to be? 20 Cr.

So here, how much you get P/B value?

20 crores you found market value divided by, you will write here total book value of the company i.e. 15 crores.

So here also, you will get the P/B ratio of 1.33.

So from here, you can use any of the formulas from these two to find out the P/B value.

But the important thing is that, What is the meaning of this?

It means that; the book value is more than the market value of the company, as it comes out to be more than 1.

How much does it look like? See this is 15 crores and this is 20 crores.

That means; the market is ready to pay the premium of 5 crores of this company.

Book value means, the value of the assets is only 15 crores.

But, the market is ready to give 20 crores for it.

So the premium of 5 crores that is the market is willing to pay, Why is it giving?

This comes out to be our next question.

So this is because of the 2 reasons mainly, First is,

It may be possible that the perception of the market is very good.

The growth of the company in the future may be very good in the future.

That's why the market is ready to pay the premium.

Secondly, we didn't even put the value of intangible assets.

Within the book value, you must have noticed that we talked about only tangible assets.

How much plants, machinery, land buildings etc. does he have?

It doesn't have intangible assets in it. Like the brand has also value.

The company may have any technology, copyrights, patent, trademarks. They also have a value.

Employees also create a lot of value. But you are not taking the value of the employees in book value.

Leadership have value, the strategy also has value.

They are not reflected in your book value. That's why the market is putting more value on it in comparison to the book value.

So now, our second question arises, where do we have to use this P/B ratio?

You have to use the P/B ratio generally for the Assets heavy industries, which generally depends on assets.

Because there many times the P/E ratio is limited. We had talked in P/E ratio also that,

there are some industries that are very cyclical.

Where the P/E ratio does not work so much, in such cases you can see the P/B ratio.

Like the oil industries, manufacturing industries, here plants and machinery are too much, land, buildings etc.

the infrastructure, real estate industries, here you will always get the book value of assets more.

Now if the book value that is in the denominator is more then naturally you will get the less P/B ratio in such industries.

Now you have to remember one thing in asset-heavy industries that how is the quality of the assets?

Is they are appreciating assets?

Which are the appreciating assets? Like land is one of the appreciating assets.

Gold is also one appreciating asset, some investments of the company can be appreciating assets.

Or the company can have depreciating assets too, like plants and machinery, these are also depreciating assets.

So from the book value, we get to know that if the company is sold by chance from any reason.

So after meeting the liabilities; How much money will be divided into the shareholders?

That's why the book value is so important. And that's why the P/B ratio is so important.

That is what price we are paying, is that too much from book value?

And secondly, you must pay attention to one more thing.

If the P/B ratio is less than 1, that means the market price is less than the book value.

So why is this happening? This is a rare case if it is happening.

So you have to pay attention that why is this happening?

Is the news coming very bad in the market about any company?

So you must be alert in such a case. When the price i.e. the market price is less than the book value.

So here we have talked about assets heavy industries.

Now the question arises that in which industries is this P/B ratio is not useful?

Service industries or technology industries are there where assets are not much used.

There are more intangible assets, like brand, technology, copyrights, their employees are main assets.

Here, you will always find the P/B ratio high because the book value of these industries is very low.

Because here the tangible assets are very less.

In such cases, you will not get better insight from the P/B ratio. So in such cases, you have to see P/E ratio.

I had already made a detailed video about the P/E ratio. You can see that.

So I think you have understood how to calculate the P/B ratio and how to interpret it.

Quickly, we will see how we can calculate the P/B ratio online.

Look at this, I have found out the financials of Reliance industries from the website of IndiaInfoline.

You can find out the stock of any company for analysis, by going onto the search option.

So here we have gone to the overview, here we are seeing the current price, so this is our share price.

And we are getting book value here as well.

So you will directly divide Rs 1162 by Rs 510, so you will get the P/B ratio.

It is as simple as that.

So now, the second important work for us is to compare this P/B ratio.

We will directly go to Peer comparison.

And see here, the value of all the competitors of Reliance Industry is visible here.

Here is the current market price, P/E ratio, market cap and many more parameters can be seen here.

We are mainly interested in which things? They are current market price and book value.

Here the book value is showing as of the last financial year according to me,

and what we saw earlier would be the current book value.

That's why a little difference is coming, there we saw Rs 510 and here it is showing Rs 496.

But none other less; is not much difference.

We compare here, so whatever values are here will be of the same financial year, according to me.

So here we do a quick comparison.

So here, if I find the P/B ratio of everything so what we will do, I divide Rs 1162 by Rs 496.

So here the P/B ratio of Reliance comes out to be 2.34.

For IOCL, I will divide 134 by 114, so it comes out to be 1.19.

And similarly, I have calculated for BPCL it comes out to be 1.89 i.e. P/B ratio.

Here for HPCL, it comes out to be 1.35.

Now when we compare these 4 companies.

So see here Reliance is getting quite a standout, here the P/B ratio is coming out very high.

Here the P/B ratio of all these is less than 2.

In fact, most are less than 1.5.

That means, in the market according to P/B, a very high premium is paid according to the book value.

2.34 times the market is paying to the Reliance. Why it is doing this?

See mainly, in Reliance industry there is Jio also other than the refinery, this is mainly consolidated figure.

So here we are seeing according to the consolidated statements, so the share price of Reliance Industry,

is also considering the Jio valuation.

So for that reason, I would say that this is not the correct comparison.

So maybe we should compare with such company,

we can compare only these 3 companies, I think Reliance is standing out a little here.

We can't exact compare it.

But I think you have understood, how to compare the P/B ratio, calculate and check online.

I hope you liked this video, so please like and share this.

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